BUDGET 22 JUNE 2010 - PERSONAL TAX ISSUES
Personal Tax Allowance
The personal allowance for 2010-11 remains at £6,475. In line with the Lib Dems’ manifesto promise – as confirmed in the Coalition agreement, the basic personal allowance will rise to £7,475 from April 2011 with a commitment to further increases towards the promised £10,000 target by the end of the present parliament.
The income figure above which higher rate tax becomes payable will be reduced from April 2011 so that higher rate taxpayers will not benefit from the increase in personal allowances.
National Insurance Contributions (NICs)
As previously announced there is to be no increase in employer’s NICs although employees’ NICs will increase by 1% from April 2011. The threshold before NICs become payable is to be increased (by an unspecified amount) so that lower paid workers will be better off.
Because the upper limit is being reduced to allow 40% income tax to be paid sooner (see above) and the upper earnings limit for NI purposes is linked to this, the upper earnings limit will be reduced. Whether this means that higher paid employees will pay less NI remains to be seen but any benefit is likely to be wiped out by extra income tax at 40%.
From April 2011 State Pension benefits will be increased each year by at least 2.5%. Under a ‘triple lock’ pensions will rise by a minimum of 2.5pc or in line with earnings or prices, whichever is the greater.
The annual allowance (the maximum allowable contributions in any year), currently £255,000, is to be reduced from April 2011 as part of a simplification of the previous proposals intended to limit higher rate tax relief for contributions. The Government will discuss the changes with interested parties but anticipates that a reformed annual allowance may be in the region of £30,000 to £45,000.
Are to be frozen for three years.
Child and Working Tax Credits
The Child Tax Credit will increase by £150 above the Consumer Price Index in April 2011.
The baby element of the Child Tax Credit will be removed from April 2011.
The following changes will also apply from April 2011:
- Reduced eligibility for families with household income above £40,000.
- Both withdrawal rates to increase to 41%.
- Reduction in the income disregard from £25,000 to £10,000.
And from April 2012, the facility to register and claim tax credits from an earlier date is to be reduced from the present 93 days (3 months) to just one month.
Previous increases in the duty on cider products have been reversed. All other duties are unchanged.
Due to be effective from 1 October 2010 this duty will no longer be implemented.
Capital Gains Tax
All of the changes noted below apply to chargeable gains made on or after 23 June 2010.
In a widely expected change to the present flat rate of 18%, a new 28% rate is to be introduced. This will be applied to individuals whose total gains and income are more than the upper limit of the basic rate band of income tax.
The 28% rate will apply to taxable gains, or any part of those gains, that are above that limit. Gains under the limit will still be taxed at 18%.
The rate for trustees and personal representatives of deceased persons is increased to 28%.
Good news for business owners contemplating a sale of their business. The rate of CGT for gains qualifying for entrepreneurs’ relief remains at an effective rate of 10% and the lifetime limit on gains qualifying for entrepreneurs’ relief is increased from £2 million to £5 million. The current system of a 4/9th’s reduction in the gain which is then taxed at 18% is abolished in favour of an actual 10% rate so that the annual exemption will now save tax at 10% rather than at 18% as previously.
Finally the annual exempt amount for 2010-11 is unchanged at £10,100.
Individual Savings Accounts (ISAs)
From 6 April 2011 ISA limits will in future be increased in line with the Retail Price Index (RPI).
Deferring pension annuity decision
The obligation to buy an annuity using your pension fund by the time you reach the age of 75 is changing. As from June 23rd 2010 anyone who has yet to reach age 75 will be able to defer a decision to purchase an annuity until age 77.
This is a stop gap measure as the intention is to abolish the requirement to purchase an annuity as from April 2011.
Furnished Holiday Lettings (FHL)
The withdrawal of the furnished holiday letting rules on 6 April 2010 has been cancelled! For the tax year 2010-11 the legislation continues as before with all its tax advantages intact.
However, the Government is to publish a consultation document over the summer about plans to change the tax treatment of furnished holiday let property from April 2011. The consultation will look at issues that:
- ensure the FHL rules apply equally to properties wherever they are in the EEA;
- increase the number of days that qualifying properties have to be available for, and actually let as, commercial holiday letting; and
- change the way in which FHL loss relief is given.
The last point in particular may merit attention as current legislation allows all furnished holiday lets losses to be set off against other income of the same year. We will advise as and when more information is released after the summer consultation.